A financial statement is a formal document that shows the financial performance and position of a business. Financial statements are important for investors, creditors, and other stakeholders to understand how well a business is doing financially.
There are three main types of financial statements: the income statement, the balance sheet, and the cash flow statement. Each statement provides different information about a business’s financial performance.
The income statement, also known as the profit and loss statement, shows the revenue, expenses, and profits or losses of a business over a specific period of time. The income statement shows how much money a business has earned and how much it has spent to generate that revenue.
The balance sheet shows the assets, liabilities, and equity of a business at a specific point in time. Assets are what a business owns, liabilities are what it owes, and equity represents the ownership interest in the business. The balance sheet shows how much a business is worth and how much it owes.
The cash flow statement shows the inflows and outflows of cash for a business over a specific period of time. It shows how much cash a business has generated from its operations, how much it has spent on investing activities, and how much it has received or paid out in financing activities.
Financial statements are prepared by accountants and audited by independent auditors to ensure their accuracy. Financial statements are important for investors to understand a business’s financial health and to make informed decisions about whether to invest in the business.
Overall, financial statements provide a comprehensive view of a business’s financial performance and position, helping stakeholders make informed decisions about the business.
Some examples of financial statements and the information they provide:
- Income Statement: The income statement of a publicly traded company like Apple Inc. shows its revenue, cost of goods sold, operating expenses, and net income over a specific period of time, such as a quarter or a fiscal year.
- Balance Sheet: The balance sheet of a large retailer like Walmart Inc. shows its assets, such as inventory, property, and equipment, as well as its liabilities, such as accounts payable and long-term debt, and its equity, which represents the value of the company owned by shareholders, at the end of a specific period, such as a quarter or a fiscal year.
- Cash Flow Statement: The cash flow statement of a tech company like Microsoft Corp. shows its inflows and outflows of cash from operating activities, such as sales revenue and payments to suppliers, investing activities, such as purchases of property and equipment, and financing activities, such as issuing bonds and repurchasing shares, over a specific period of time, such as a quarter or a fiscal year.